On the Soapbox

The Language of Public Opinion

Monday, April 6, 2009
Keywords: Politics, Economics

A sad and unfortunate fact of politics is that the choice of language can have a large influence over public opinion. As defenders of the estate tax learned in the 90's, once the language of "death tax" became common, the battle was lost, as the new terminology obfuscated the debate and led many voters to unwittingly support a measure that ran counter to their own self-interests.

And so it is with great disappointment that I see the widespread use of the word "nationalization" in the policy debates surrounding the financial crisis. Nationalization is a term tinged with statism, evoking images of bureaucratic morass and fears of government-run banks that offer customer service comparable to that of the local DMV. The use of such a word with so many negative connotations in our mostly libertarian society rallies opposition and all but guarantees the failure of whatever plan that has been associated with it.

But aside from the emotional and political obfuscations of the word itself, there is also a significant amount of substantive obfuscation, to the point that the use of "nationalization" in the debate is, quite simply, inaccurate and misleading. The proponents of "nationalization" solutions are adamant that they do not want government to run the financial institutions and that their plans are temporary: government would take control, wipe out the shareholders, replace the management, sell the healthy parts of the institution back to the private market, and hold onto the unhealthy parts, doing damage control and shouldering the losses. The government would hold onto the firm for only as long as it is needed to complete the process. For smaller institutions, this process can literally take place overnight—the government would have "nationalized" the firm for only a matter of hours before it would be privatized again (for huge firms, this could take a few months, which is still a short amount of time). One must keep in mind that, without the string of government financial interventions, the shareholders would have already been wiped out months ago and that these institutions would have ended up in a bankruptcy court. Effectively, a "nationalization" of this sort would not be very different, in principle, from the bankruptcy that would have been dealt to these firms by the free market—anything seized by the government would probably have been forfeited if it were not for the government interventions. As Simon Johnson, one of the most vocal proponents of this approach noted recently, the plan is really just a "managed bankruptcy." A former banking regulator who worked on the savings and loan crisis recently noted, "Ronald Reagan did receiverships. Nobody called it nationalization."

These managed bankruptcies do exactly what needs to be done: it punishes those who deserve to be punished (owners of the troubled firms), and it flushes out the toxic assets so that the financial sector can finally return to health. In fact, these managed bankruptcy plans do what the free market would have done, except in a less chaotic, less destructive, more orderly, and more expedient manner. Economists generally agree that the financial market's return to health is a necessary prerequisite for an economic recovery, and that the fiscal stimulus can work only if the financial sector works as well. Despite the recent string of hopeful news, the financial sector is still far from recovering. The recent increase in credit and lowering of mortgage rates was made possible only by radical, unprecedented actions taken by the Federal Reserve to fill the void left by the financial institutions. While I applaud Bernanke for taking these bold steps, the Fed's involvement cannot be sustained indefinitely and should be seen only as a temporary stopgap measure to buy us time—time that the Obama Administration so far seems intent on squandering.

The managed bankruptcy solution is not radical, either. This is a process that, under the moniker of a "FDIC intervention", is regularly used to deal with small and medium institutions. This was the process used to resolve the savings and loan crisis two decades ago. This was the process that the IMF and the United States government have recommended and prescribed time and time again when financial crises hit other countries. This is a solution that will soothe the anti-bailout sentiment in this country. This is a solution that will please Democrats who want to see Wall Street firms punished. This is a solution that will please Republicans who have been calling for bankruptcy and for the government to stop shielding the financial sector from the judgment of the market.

Opponents of this plan—the Obama Administration under Geithner and Summers—claim that "nationalization" does not work because markets work best. But the proponents of "nationalization" are not suggesting anything that remotely resembles what most people associate with "nationalization"; in fact, it is the "nationalization" plans of managed bankruptcies that are the most faithful to the market—the Obama Administration's plan is nothing more than a dressed-up version of crony capitalism.

Although it is understandable that opponents to managed bankruptcies would seek to smear such plans as "nationalization," it is strange to see its proponents, such as Paul Krugman and Simon Johnson, use that same terminology. Perhaps it is because they are not seasoned political players, but it seems clear to me that the first step to selling this plan is to regain control of the message. So let us take one small step in the right direction and stop talking about "nationalization" and start talking about "receiverships" and "managed bankruptcies" instead.

This entry was edited on 2009/04/06 at 22:05:38 GMT -0400.